A senior Indian economic official welcomed China’s recent move on the yuan. Speaking to Business Standard in New York, Planning Commission Deputy Chairman Montek Singh Ahluwalia, who also doubles as Prime Minister Manmohan Singh’s G-20 sherpa, said: “Moving from a rigid peg to what looks like a more flexible arrangement is a serious move and I think they should be complimented for it.”
India has been among a number of countries favouring a more flexible float for the yuan and Ahluwalia said China’s announcement of this decision over the weekend was the right move. He added: “I think they are probably signalling that they’ll do something similar to what we’ve been doing. That’s quite sensible I think. And, I think they’re also right that they’re not going to free it completely. We haven’t freed it completely.”
The valuation of the yuan was expected to be one of the most contentious issues at the forthcoming G-20 summit. With China timing its announcement to the eve of the summit, Ahluwalia observed that “it will certainly eliminate a lot of criticism that was coming from certain quarters about Chinese exchange rate policy. Now whether they’ve done it because they think this is the right time or whether they’re doing it because of pressure is a matter of speculation and I wouldn’t want to comment on that.”
Ahluwalia was, however, quick to deflate a trial balloon floated by Russia’s President Dmitry Medvedev on the eve of the G-20 summit that the Indian rupee could join the Russian ruble and Chinese yuan as an alternative reserve currency. Ahluwalia effectively ruled out such a role for the rupee, when he said: “No currency can become a reserve currency unless it’s made fully convertible. To make a currency fully convertible, you have to completely open transactions in the capital account and I don’t think we are ready to do that.”
With China only now signalling that it would move “gradually” to make its exchange rate more flexible, that would appear to knock another currency off President Medvedev’s proposed basket of alternative reserve currencies.
There is a sense of wonder almost bordering on envy, in Indian government circles about the timing of China’s announcement, coming as it does following relentless pressure from the US and other countries to let the yuan appreciate to what’s considered a more realistic level. Any similar action taken by any Indian government on the eve of a crucial meeting would surely have kicked off a political firestorm at home as well as allegations of buckling under US pressure.
Fiscal stimulus
Now that the yuan has been taken off the G-20 list of contentious issues, its place is likely to be taken by the ongoing austerity versus stimulus debate between the United States and the euro zone countries. Ahluwalia called it “perhaps the most important issue before the G20 in terms of policy coordination”.
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US President Barack Obama had written to G20 leaders earlier this month arguing against any quick withdrawal of economic stimulus measures in their countries, warning it would derail the global economic recovery.
This position looks likely to be challenged strongly in Toronto, especially by Germany and other European countries. Germany’s Chancellor Angela Merkel has asserted that European G20 members would make deficit reduction a “central theme” in Toronto. She has also said: “We will talk about when we’ll switch from the phase of economic stimulus programmes toward lasting budget consolidation. In the opinion of Europe’s participants, and especially Germany, this is urgently necessary.”
India would seem to come down on President Obama’s side on this subject. Ahluwalia clarified that Prime Minister Manmohan Singh would convey India’s position at the summit, but noted, “Our view, I think, reflects a concern that too hasty an exit from the stimulus might jeopardise the economic recovery. While it’s true that the fiscal position in many industrialised countries has deteriorated and therefore some corrective steps are necessary, the focus should be on how to bring the fiscal balance back over a medium term and not immediate withdrawal of stimulus.” He also said that a generalised withdrawal of stimulus in industrialised countries would not work to India’s advantage.
Referring to stimulus measures in India, Ahluwalia said: “The big stimulus in India was really the fiscal stimulus. We are planning on a reduction in the fiscal deficit in the current year, compared to the previous year. So, in any case there is a measured withdrawal of the stimulus. The Reserve Bank of India is also getting back to a more normal stance of monetary policy.”
Ahluwalia is scheduled to attend the G-20 meeting in Toronto on June 26 and 27 as part of the Indian delegation led by the Prime Minister.